1984 (10) TMI 126 - AT - Income Tax

Summary

Issues Involved:
1. Assessment of remuneration drawn by Jayabalan: Whether it should be assessed in the hands of the HUF or as individual income.
2. Applicability of Supreme Court precedents on the nature of partner's salary and its tax implications.

Detailed Analysis:

1. Assessment of Remuneration Drawn by Jayabalan:

The primary issue was whether the remuneration drawn by Jayabalan from the firm M.S.P. Muthu Sons should be assessed in the hands of the Hindu Undivided Family (HUF) or as Jayabalan's individual income. The Income Tax Officer (ITO) included the remuneration of Rs. 21,000 in the hands of the HUF, arguing that it was additional income of the HUF. However, the Appellate Assistant Commissioner (AAC) reversed this decision, holding that the remuneration was for Jayabalan's personal services and should be assessed as his individual income.

The Tribunal examined the facts and noted that Jayabalan was a commerce graduate with significant experience in managing business affairs. The remuneration was explicitly stated in various partnership deeds as compensation for his personal services, skill, and aptitude in managing the firm's administrative and financial affairs.

2. Applicability of Supreme Court Precedents:

The Tribunal considered several Supreme Court decisions to determine the correct tax treatment of the remuneration. Key cases included:

- CIT v. Kalu Babu Lal Chand [1959] 37 ITR 123: The Supreme Court held that while the karta of an HUF can enter into a partnership on behalf of the family, the income attributable to the personal exertion of the karta is assessable in his hands as an individual.
- Ram Laxman Sugar Mills v. CIT [1967] 66 ITR 613: The Supreme Court reiterated that the income attributable to the personal exertion of the karta remains his individual income, not the HUF's.
- CIT v. R.M. Chidambaram Pillai [1977] 106 ITR 292: The Supreme Court held that salary paid to a partner is essentially a share of the profits and retains the character of profits for tax purposes.

The Tribunal noted that the remuneration paid to Jayabalan was for his personal services and not a return on the investment of family funds. The Supreme Court's decision in Raj Kumar Singh Hukam Chandji v. CIT [1970] 78 ITR 33 provided a broader principle: if remuneration is essentially for services rendered by the individual, it is the individual's income, not the HUF's.

The Tribunal applied these principles to the facts of the case. The HUF's investment in the firm was Rs. 15,000, and the share income from the firm exceeded this investment in several years. The Tribunal concluded that the remuneration paid to Jayabalan was for his personal services in managing a business with a turnover ranging from Rs. 1.24 crores to over Rs. 3 crores, which required significant personal effort and expertise.

Conclusion:

The Tribunal upheld the AAC's decision, confirming that the remuneration of Rs. 21,000 paid to Jayabalan was for his personal services and should be assessed as his individual income, not the HUF's. The appeals of the revenue were dismissed.

Final Judgment:

The Tribunal ruled that the remuneration paid to Jayabalan was compensation for his personal services and should be excluded from the HUF's income, thereby affirming the AAC's decision and dismissing the revenue's appeals.